Citi Has Nowhere to Go...

...but up, if it continues to take even mediocre steps toward righting itself, writes MoneyShow's Jim Jubak, also ofJubak's Picks.

Citigroup (C) is nowhere as good a bank as the one I just sold out of Jubak’s Picks—Australia’s Westpac Banking (WBK).

But Citigroup does have one major advantage: it is still in the relatively early stages of digging itself out of the mess the global financial crisis left behind. And that means it has considerable upside if all it does is perform like an average bank.

So, for example, in the first quarter as reported by the bank on April 15, Citigroup reported that the net loss at its “bad bank,” Citi Holdings, fell by 20% year over year to $795 million.

And finally, Citigroup decided that the market for the $86 billion in North American mortgages held by the bad bank had improved enough that it could release some of the reserves—$375 million—that it had set aside against losses on these mortgages. (Citigroup itself released another $301 million in reserves.)

Delinquencies on the residential mortgages and home equity loans in the Citi Holdings portfolio had fallen in the quarter to a still-high 6.1%, from 8.6% in the first quarter of 2012. Citi Holdings still has $7.5 billion in reserves. Credit Suisse estimates Citi Holdings reserve releases will total $800 million in 2013.

Citigroup had reduced Citi Holdings’ bad bank assets to 8% of the bank’s total assets as of the end of the March quarter. Total assets at the bad bank were down to $149 billion, from $209 billion in March 2012 and $827 billion at the end of 2008.

That reduction in the weight of bad assets helped Citigroup improve its capital ratios. The bank’s core capital ratio climbed to 9.3% at the end of the quarter from 8.7% at the end of December. The bank’s target is 9.5%.

Improving that capital ratio—currently ahead of schedule—is key to Citigroup winning approval from the Federal Reserve to increase its payout to investors.

In 2011, the Fed vetoed any payout in the form of either dividends or share buybacks. Citigroup got approval for a modest pay out in 2013. And while in the bank’s conference call, CEO Mike Corbat threw cold water on an increase for 2013, Wall Street analysts came away saying that they expect a substantial buyback in 2014.

All this means that while Citigroup is suffering from the same slow growth in mortgages and lending that have marked results from Wells Fargo (WFC) and JPMorgan Chase (JPM), the bank does have more remaining upside from reserve releases and approval of a big buyback plan to drive the bank’s shares upward in the medium run.

After that, of course, Citigroup will have to prove that it can regain traction in its key markets—but that’s a story for another day.

I’m adding the shares to Jubak’s Picks today, with a 12-month target price of $55 a share.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund, I liquidated all my individual stock holdings and put the money into the fund. The fund did not own positions in end of December, see the fund’s portfolio here.